Fed and ECB part ways

In this interest rate outlook, we present our expectations for both central banks, the ECB and the US Fed, as well as for the respective government bond markets, in a concise manner, as always. In addition, we focus on the capital market-oriented topic of European government bonds. This has come into the spotlight due to the significant widening of the credit risk premium for French government bonds compared to Germany and the political quarrels in France.

Fed cuts rates while ECB reaches its target

Following its latest key interest rate cut of 25 basis points (bp) on September 17, the US Federal Reserve is poised to implement further key interest rate cuts and thus pursue a less restrictive monetary policy. Over the next few quarters, key interest rates are likely to move from their current upper limit of 4.25% towards a neutral interest rate level of 3%. We expect two further interest rate cuts of 25bp each this year. In addition to economic uncertainties in the US, which are weighing on private consumption and business investment, the increasingly weak labor market is now more often being identified as a driver of the interest rate reduction cycle. However, the Fed is still struggling with the problem of currently rising inflation. Most of this year's increase is due to tariff-induced inflation, which should be a one-off event. Nevertheless, it is difficult to predict whether there are also more sustainable elements in the rise in goods prices or whether these are being generated as a result. If the Fed were to implement its monetary policy too quickly and too loosely, there would be a risk of additional price inflation, as lower interest rates would provide a significant boost to consumption and investment, which would lead to rising prices if supply remained constant.

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